The death throes of British finance have been slow and painful to watch, but yesterday was the day the penny finally dropped: our banks are bust.

This is not something you would glean from watching the stock market or listening to the government. Bank shares actually rose after the Treasury announced a generous insurance scheme to "reduce uncertainty" in Royal Bank of Scotland.

Unfortunately, the only certain thing about RBS is that it is losing money faster than any company in British history. Some £24bn went up in smoke yesterday and RBS said it needed to "insure" another £302bn of loans in case they went sour too. Not long ago these loans were deemed to be worth £325bn, but blink these days and the billions come around faster than a Gordon Brown budget speech.

The problem - as if it needs spelling out - is that RBS does not have billions to burn any more. Investors long ago decided not to throw good money after bad unless the taxpayer was there to pick up the pieces - hence yesterday's "insurance scheme".

Only, this is not an insurance scheme that you or I would recognise. RBS is being charged a "premium" of £6.5bn for the government to cover its missing assets, but has decided to pay for the premium by issuing otherwise worthless shares - a bit like taking out buildings insurance after your house has burnt to the ground and asking the insurer to lend you the money to pay the premium. With terms as generous as this, it is no wonder the tiny minority of remaining private investors saw a chance for a quick buck.

But the terms reveal a deeper truth. The reason the government cannot negotiate anything resembling a more commercial arrangement is that we effectively own RBS already: we would just be negotiating with ourselves. If all the shares RBS issues to pay for the insurance ever do become worth something again, we will end up with 95% of the company. Had the government charged a more realistic rate, RBS could not have paid.

All this is just a very complicated way of saying that RBS is bust and we have nationalised it but don't want to admit it: we own virtually all of it and we are exposed to virtually all of its worst liabilities.

Why the government won't spell this out remains a bit of a mystery. One answer is they want to retain the theoretical possibility of private investors regaining confidence and pumping in more money of their own. The more alarming explanation is that this logic would imply most of the rest of the industry was bust too.

The irony is that the only person left with any certainty yesterday was Sir Fred Goodwin, the former chief executive of RBS who scaled new heights of arrogance by refusing to renegotiate his £16m pension settlement.

Without this latest government bail-out, Goodwin would be at the back of a very long queue: just another unsecured creditor asking for his money back. Instead, he is now in the exquisite position of heaping even more misery upon the government.

By revealing the details of the exit package he negotiated with the Treasury, Goodwin has given a lie to the claims from Alistair Darling that he knew nothing of the pension windfall. That's the problem with owning banks, it is no longer possible to blame other people for their mistakes.

But this is more than just a political embarrassment. When this much taxpayer pain is involved, it is vital the electorate feels everyone is suffering equally. The sight of Fred Goodwin having the last laugh makes it very clear it is not.